Law Practice Management Asked and Answered Blog

Category: Credit

Feb 05, 2019

Law Firm Client Level vs Matter Level Client Origination Credit

Question: 

I am the owner of an eight-attorney insurance defense law firm in the greater Chicago area. All of the other attorneys in the firm are associates. They are currently paid a salary plus a bonus for billable hours that exceed certain thresholds. I am in the process of establishing a non-equity partner tier and for this tier I want to setup a different compensation system with the focus on collected revenues rather than billable hours. I will continue to pay non-equity partners a salary with a bonus for collected working attorney and responsible attorney fees for other timekeepers work over target threshold’s. I have given some thought to client origination of business but since we have a small universe of insurance company clients not sure how this would play out. I would appreciate your thoughts.

Response: 

I agree that at the non-equity partner level you should consider shifting the focus to collected revenues rather than billable hours. At the non-equity partner level it should be your goal for them to become managers of work (responsible attorneys) rather than just workers (working attorneys). Therefore, I believe that your compensation system should compensate the non-equity partners for their individual work (working attorney collections) as well encourage them to delegate and push work out to associates and paralegals (responsible attorney collections).

Client origination is the other variable that some firms include in their compensation programs. The general idea is that attorneys should be Finders, Minders, and Grinders. In an insurance defense firm it will be difficult for associates and non-equity partners to originate new clients at the client level.

The firm’s existing clients were probably all originated by you and there are probably a limited number of new client opportunities. While I believe your focus for non-equity partners should be on working attorney and responsible attorney collections, I think that it is important that you at least track business or client origination so that you measure your non-equity partners business development efforts and results. A better origination measure to track in your situation might be new matter origination rather than client origination. I suggest that you track, and not directly compensate, origination at the non-equity partner level. Track and reward via a salary increase or discretionary bonus instead.

Click here for our blog on compensation

Click here for articles on other topics

John W. Olmstead, MBA, Ph.D, CMC

 

 

 

May 22, 2018

Law Firm Financial Management – Using Credit Line to Purchase Equipment

Question: 

I am the financial partner with our sixteen attorney firm in Indianapolis, Indiana. The firm has had a rough couple of years. We had several partners leave the firm and they took several corporate clients with them. Unfortunately, this was ongoing consistent retainer and time bill work. While we still have some retainer and time bill corporate work, a much larger mix of our work is now contingency fee work. As a result we have had some cash flow challenges and for the first three months of this year there was no money to pay partner draws. We have a credit line with the bank of $125,000 that we have not used. We only use our credit line for long-term equipment purchases. We would appreciate any suggestions that you have.

Response: 

A line of credit is designed to be used for financing short-term working capital needs – not long-term financing needs such as fixed asset acquisitions. I would use either leases or long-term bank loans for equipment and other fixed asset financing secured by those assets. This leaves your your credit line available for short-term financing needs. While I hate to see a firm use a credit line to pay partner draws, often there is no other choice in law firms that are not adequately capitalized, especially contingency fee firms.  Partners have to eat too. Contingency fee practices can have wide cash flow swings and often have to use their credit lines to temporarily fund payroll and partner draws.

Click here for our financial management topic blog

Click here for our law firm profit improvement blog

Click here for articles on other topics

John W. Olmstead, MBA, Ph.D, CMC

 

Jun 02, 2015

Law Firm Partner Compensation and Client Origination Credit

Question:

Our firm is an 8 attorney general practice law firm located in Kansas City, Missouri. Five of the attorneys are equity partners and the other three are associates. The two founding partners are the only ones in the firm that bring in clients – the other partners are just workers. Currently the partners are paid based upon their collections for cases/matters to which they are assigned. They are also credited for work that others do on their assigned matters as well. We are concerned that in a general practice firm such as ours, everyone must be bringing in clients and we are considering changing our compensation system to factor in credit for client origination – bringing in clients. I would appreciate your thoughts.

Response:

All law firms need a mix of finders, minders, and grinders. Finders (client originators) are needed to provide sufficient work to keep the workers busy. Minders (responsible matter attorneys) are needed to manage the portfolio of client work. Grinders (working attorneys) are needed to service and produce client services.  While there are exceptions, in most firms partners must hit on all three of these cylinders. In other words, most of the partners must do well at finding, minding, and grinding. Partners may perform some of these roles better than others, however overall they should be competently performing each of the roles. Very few firms can afford the luxury of having several senior partners only bringing in business without being required to maintain personal production levels as well. Partner compensation research concludes that the most a law firm can afford to pay a rainmaker – over and above his or her own billable hours (fee collections) is the marginal profit derived from the associates the rainmaker can keep busy, regardless of how many partners he or she occupies. The most valuable partners are those who offer a balance of skills: worker, delegator, supervisor, and rainmaker.

Since origination of new clients is the lifeblood of any firm it is a key factor that should be recognized in any compensation system. The exact weight that it is given will depend upon the firm and how dependent it is upon constant client replacement, only a few institutional clients, turnover of clients, leverage ratio, etc. A firm that has a well diversified base of institutional long time clients will typically weigh client origination much lower than a firm that has to constantly replace individual clients.

Click here for our blog on compensation

Click here for our published articles

John W. Olmstead, MBA, Ph.D, CMC

 

Archives

Categories

    Subscribe to our Blog